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Increased Competition, Better Skills Vital to Stimulate Innovation in India: World Bank Report

Contacts:
In Delhi
Sudip Mozumder (91 11) 2461 7241
sudipmozumder@worldbank.org 

In Washington                                                                     
Erik Nora (202) 458 4735                                               
eriknora@worldbank.org

New Delhi, October 4, 2007 ─ India is increasingly becoming a top global innovator for high-tech products and services, but the country can do much more to reach its full innovation potential, especially by bringing the benefits of innovation to the poor, says a World Bank report released today. 

The report - Unleashing India’s Innovation - emphasizes how creating and commercializing ‘new to the world knowledge,’ as well as diffusing and absorbing existing knowledge can help India to sustain faster growth. One of the unique features of this report is its focus on inclusive innovation – that is, knowledge creation and absorption efforts that are most relevant for the needs of the poor. To spur broad innovation efforts, more needs to be done to increase competition, build stronger skills, improve information infrastructure, and provide more public and private finance for R&D and its commercialization.

"The world has acknowledged India’s R&D potential and more than 300 multinational corporations have set up R&D and technical centers in India," said Isabel Guerrero, World Bank Country Director for India.As important if not more, is the better diffusion of existing knowledge across India. Based on a 2006 World Bank Enterprise Survey of roughly 2,300 manufacturing enterprises in 16 Indian states, absorbing existing technology (whether generated domestically or acquired from abroad) has a stronger, more significant association with enterprise productivity than does spending on R&D."

Innovation in India must be thought of as improving practices across the entire economy. While India is emerging as a top global innovator in sectors such as biotechnology and information technology, less than 3 percent of the Indian workforce is in the modern private sector, while roughly 90 percent remains in the informal sector. “The disparities in productivity levels across firms within manufacturing sectors is wider in India than in China, Mexico, the Russian Federation, and the Republic of Korea,” said Mark Dutz, World Bank Senior Economist and editor of the report. “The output of the economy could increase more than five-fold if all enterprises could achieve national best practices based on knowledge already in use in India.

The report also stresses that new domestic R&D and knowledge needs to be better converted to commercial use. Of the top 50 applicants for patents in India between 1995 and 2005, 44 were foreign firms. Only 2 were private Indian firms. Actions are needed to promote commercialization and to strengthen links among industries, universities, and public R&D laboratories. These could include providing support to technology transfer offices, creating a patent management corporation, strengthening innovation infrastructure including metrology, standards & quality systems, and technology parks and incubators, promoting angel investing and early stage pre-venture capital financing, and improving India’s regime for intellectual property rights.

India would especially benefit from fostering more inclusive innovation, the report says. This could be achieved by promoting more formal R&D efforts for the poor people and more creative grassroots efforts by them, as well as by improving the ability of informal enterprises to better use existing knowledge.

Existing pro-poor initiatives need to be scaled up,” said Mark Dutz. “Inclusive innovation can play a critical role in lowering the costs of goods and services and in creating income-earning opportunities for poor people. Grassroots innovation networks should be formally evaluated and supported, and government programs should promote more knowledge absorption in the productive sector and help extend the power of innovation to the common man.”

India has one of the largest systems of higher learning in the world, with some institutions of world class quality. But, India’s small numbers of high-quality institutions are not enough to meet the country’s growing demand for skilled personnel. To maintain its share of global knowledge services, India will need 2.3 million knowledge professionals by 2010. Instead it may face a deficit of 0.5 million workers. The higher education system therefore needs to respond adequately to the economy’s rapidly changing needs. To achieve this, the report recommends an increase in the fiscal and managerial autonomy of universities and colleges, and the encouragement of greater private participation in higher education.

In-service training is another important means of imparting skills, and Indian firms that provide in-service training are 23–28 percent more productive than those that do not. Today, only 16 percent of Indian manufacturing firms offer in-service training, compared with 92 percent in China. The report therefore suggests that matching public funds be provided to firms to invest in training of personnel. 

Encouraging stronger competition among enterprises is particularly important. Since the Indian economy opened up in 1991, the vast majority of private sector investments in R&D were in sectors most open to competition. The report calls for more intense competition among enterprises and suggests removing nonessential regulations in product, land, labor, capital and infrastructure markets. It also recommends making it easier for enterprises to take risks, and reallocating resources when new ventures don’t turn out as planned. It suggests the easing of remaining limits on small industries, restrictions on foreign direct investment, and barriers to import competition.
 
Some 2 percent of Indians live abroad; together they earn almost 2/3 of India’s GDP. The report therefore recommends that new ways be explored to leverage the entrepreneurs and technologists of India’s diaspora.

Finally, the report says while public programs supporting innovation have achieved significant success, their outcomes have not been commensurate with the needs of the Indian economy or the resources invested in them. A new approach is being considered—one that leverages the strengths of the public and private sectors in designing and operating innovation support programs, with a greater focus on inclusive innovation, as well as better monitoring and evaluation (and international benchmarking) of public support programs.

To access the full report, visit http://go.worldbank.org/GOIFSXUF10

To lean more about the World Bank in India, visit http://www.worldbank.org/in




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